Question

Cowboy is expected to (1) pay a cash dividend of $11 per share one year from now, and (2) dissolve and pay a liquidating dividend of $30.25 per share two years from now. Cowboy is all equity financed with a required rate of return of 10%. What is the stock price per share of Cowboy one year from now?

Answer #1

present value = future value / (1 + required return)^{number
of years}

Stock price 1 year from now = liquidating dividend / (1 +
10%)^{1}

Stock price 1 year from now = $27.50

(Here, we are assuming that the stock price is calculated just after the cash dividend is received. However, if we need to calculate the stock price just before the cash dividend is received, simply add the cash dividend amount to the stock price calculated above. Stock price 1 year from now (just before cash dividend is received) = $27.50 + $11 = $38.50)

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